Long Strangle

The Strategy

A long strangle gives you the right to sell the stock at strike price A and the right to buy the stock at strike price B.

The goal is to profit if the stock makes a move in either direction. However, buying both a call and a put increases the cost of your position, especially for a volatile stock. So you’ll need a significant price swing just to break even.

The difference between a long strangle and a long straddle is that you separate the strike prices for the two legs of the trade. That reduces the net cost of running this strategy, since the options you buy will be out-of-the-money. The tradeoff is, because you’re dealing with an out-of-the-money call and an out-of-the-money put, the stock will need to move even more significantly before you make a profit.

Options Guy's Tips

Many investors who use the long strangle will look for major news events that may cause the stock to make an abnormally large move. For example, they’ll consider running this strategy prior to an earnings announcement that might send the stock in either direction.

Unless you’re dead certain the stock is going to make a very large move, you may wish to consider running a long straddle instead of a long strangle. Although a straddle costs more to run, the stock won’t have to make such a large move to reach your break-even points.

The Setup

Buy a put, strike price A

Buy a call, strike price B

Generally, the stock price will be between strikes A and B

NOTE: Both options have the same expiration month.

Who Should Run It

Seasoned Veterans and higher

NOTE: Like the long straddle, this seems like a fairly simple strategy. However, it is not suited for all investors. To profit from a long strangle, you’ll require fairly advanced forecasting ability.

When to Run It

You’re anticipating a swing in stock price, but you’re not sure which direction it will go.

Break-even at Expiration

There are two break-even points:

Strike A minus the net debit paid.

Strike B plus the net debit paid.

The Sweet Spot

The stock shoots to the moon, or goes straight down the toilet.

Maximum Potential Profit

Potential profit is theoretically unlimited if the stock goes up.

If the stock goes down, potential profit may be substantial but limited to strike A minus the net debit paid.

Maximum Potential Loss

Potential losses are limited to the net debit paid.

TradeKing Margin Requirement

After the trade is paid for, no additional margin is required.

As Time Goes By

For this strategy, time decay is your mortal enemy. It will cause the value of both options to decrease, so it’s working doubly against you.

Implied Volatility

After the strategy is established, you really want implied volatility to increase. It will increase the value of both options, and it also suggests an increased possibility of a price swing. Sweet.

Conversely, a decrease in implied volatility will be doubly painful because it will work against both options you bought. If you run this strategy, you can really get hurt by a volatility crunch.

Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult your tax adviser. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.

System response and access times may vary due to market conditions, system performance, and other factors.

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